With the Labour authorities set to current its first finances on 30 October, anticipation is mounting as companies and people alike brace for potential tax modifications and spending shifts.
Chancellor Rachel Reeves has made it clear that tax hikes are inevitable, framing them as essential for restoring fiscal and financial stability. In her deal with on the authorities’s funding summit earlier this week, Reeves underscored the significance of this stability as a precursor to funding, signalling that companies perceive the necessity for such measures to “balance the books.”
Whereas Labour pledged to not increase key taxes affecting working individuals, comparable to revenue tax, VAT, and private nationwide insurance coverage contributions, the get together left the door open to elevating employers’ nationwide insurance coverage contributions, capital features tax (CGT), and different levies, together with these on the playing sector. The rumoured modifications have already sparked concern amongst some industries, with UK-based bookmakers seeing their shares fall following stories of potential tax will increase of as much as £3 billion within the upcoming finances.
In the meantime, Prime Minister Sir Keir Starmer has sought to calm nerves, dismissing hypothesis that CGT might rise to 39% as “wide of the mark,” however confirmed that tax will increase could be a part of the plan to revive the UK’s financial footing. This comes towards a backdrop of criticism from the enterprise neighborhood relating to Labour’s dealing with of the financial legacy left by the earlier Conservative authorities, with claims of a £22 billion fiscal deficit requiring “difficult decisions.”
Right here’s a breakdown of the attainable modifications that Chancellor Reeves might announce within the Autumn Finances 2024:
Employers’ nationwide insurance coverage contributions
Some of the vital potential measures is an increase in employers’ nationwide insurance coverage contributions (NICs). Though Labour dominated out growing NICs for workers of their election manifesto, they didn’t lengthen this promise to employers. Jonathan Reynolds, the enterprise secretary, hinted at this chance, stating that elevating employers’ NICs may very well be a viable option to increase Treasury income with out immediately impacting staff.
A one proportion level improve in employers’ NICs might increase roughly £8.9 billion a 12 months, providing a considerable increase to authorities funds because it seeks to plug the fiscal hole. Nevertheless, this transfer might face opposition from companies already battling greater prices amid inflation and rising rates of interest.
Capital features tax
Capital features tax (CGT) is one other space below scrutiny. Though Starmer has performed down the probability of CGT rising as excessive as 39%, the chancellor should look to improve CGT charges to carry them extra consistent with revenue tax charges, or increase the vary of belongings topic to CGT. Presently, CGT is levied at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers, with the next charge utilized to property transactions.
Rising CGT might increase vital income, but it surely additionally dangers disincentivising funding within the UK, notably within the tech and start-up sectors, which rely closely on capital funding. Some buyers have already accelerated plans to promote their companies forward of potential tax will increase, highlighting the uncertainty surrounding this challenge.
Non-domiciled tax standing
The controversial non-domiciled tax standing, which exempts foreign-earned revenue from UK taxation, can also be on the desk. Whereas Labour has beforehand criticised the system for permitting rich people to keep away from UK taxes, there are considerations that altering this standing might deter high-net-worth people and companies from finding within the UK.
Billionaire John Caudwell, a former Tory donor who switched to supporting Labour, warned towards drastic modifications to the non-dom tax regime, cautioning that it might hurt the UK’s potential to draw rich buyers. Any modifications to this tax standing would should be rigorously balanced to keep away from unfavourable impacts on inward funding.
Revenue tax thresholds
Though the chancellor is unlikely to boost revenue tax charges, she might decrease the thresholds at which the varied tax bands kick in. Presently, people pay 20%, 40%, and 45% revenue tax relying on their earnings, however decreasing the thresholds would carry extra individuals into the upper tax brackets.
This transfer would enable the Treasury to extend income with out breaking Labour’s promise to not increase revenue tax charges. In line with the Institute for Fiscal Research (IFS), decreasing the private allowance or the basic-rate restrict by 10% might generate an extra £10 billion and £6 billion, respectively, in annual income. Nevertheless, this strategy would nonetheless really feel like a tax hike to many, as it will successfully improve the tax burden on middle-income earners.
Pensions
Reeves is anticipated to again away from earlier plans to chop tax reduction on pension financial savings, following warnings that such a transfer would disproportionately have an effect on public sector staff, together with academics and nurses. Presently, pension contributions are eligible for tax reduction on the saver’s marginal charge of revenue tax, which means greater earners obtain 40% or 45% reduction on contributions.
Whereas decreasing pension tax reduction might probably increase billions, it will threat alienating a key part of the voters and sparking backlash from unions and public sector organisations. Consequently, it appears possible that the chancellor will keep away from making vital modifications on this space for now.
Inheritance tax
Inheritance tax (IHT) is one other space the place Reeves might introduce reforms. Whereas IHT presently applies to solely round 4% of estates, it’s usually considered as an unfair type of double taxation. Labour might look to improve income from IHT by eradicating exemptions for enterprise and agricultural belongings, that are presently handed on tax-free.
A cap on these exemptions, or their abolition altogether, might increase round £2 billion yearly, in line with the IFS. Different potential modifications embrace closing loopholes that enable rich people to keep away from CGT when passing on estates to their heirs, which might generate further funds for the Treasury.
Gas responsibility
Reeves might break with the Conservative custom of freezing gasoline responsibility, which has been in place since 2011. Rising gasoline responsibility might increase an extra £6 billion a 12 months, which would offer a big income increase at a time when the federal government is seeking to shut the fiscal deficit. This transfer might additionally assist steer motorists in the direction of extra environmentally pleasant automobiles, aligning with Labour’s inexperienced agenda.
Personal fairness income
The taxation of personal fairness income, notably carried curiosity, has lengthy been a contentious challenge. Presently, carried curiosity is taxed as capital features quite than revenue, which means non-public fairness executives profit from decrease tax charges. Rising the tax charge on carried curiosity to match revenue tax charges might increase an extra £2 billion in income, although it might additionally result in behavioural modifications that cut back the general tax take.
Playing taxes
Studies that the federal government is contemplating elevating taxes on UK-based playing corporations by as a lot as £3 billion have already shaken the markets. Whereas Labour might even see the sector as a possible supply of serious income, there are considerations that such a transfer might hurt the trade and result in job losses.
Different tax choices
Reeves has dominated out a wealth tax, regardless of stress from commerce unions to introduce one. Nevertheless, the chancellor might introduce a brand new tax modelled on the well being and social care levy launched by Boris Johnson’s authorities in 2021. Such a levy might present a brand new income stream with out breaching Labour’s guarantees on revenue tax, VAT, or private nationwide insurance coverage contributions.
Fiscal guidelines
The chancellor can also tweak the fiscal guidelines to create extra room for public funding. By adopting different debt measures, comparable to public sector web value (PWNW) or public sector web monetary liabilities (PSNFL), Reeves might improve fiscal headroom by as a lot as £60 billion, offering further funds for infrastructure and public companies.
